Monday 7 November 2011 19.05 EST
First published on Monday 7 November 2011 19.05 EST

Backbench MPs have demanded the right to veto the appointment of Bank of England governors as part of a radical reform of the way Threadneedle Street is run.

The Commons Treasury select committee (TSC) said the successor to Sir Mervyn King should serve only one eight-year term and urged modernisation of the Bank's "antiquated" governance.

The MPs concluded that a single, non-renewable eight-year term for a governor would ensure the holder of the post was free from political interference but also be forced to move on before becoming obsolete in the role. Since 2009 governors have been allowed to serve two five-year terms.

"The present provision for the renewal of the term of office of five years could cause instability and at least the perception of political interference in the Bank," the report said.

The committee said it also wanted overhaul of the Court – in effect the board of directors – which comprises 16 directors after a revamp only two years ago. The MPs reckon it should be slimmed down to 12, given a new name – supervisory board – and publish the minutes of its meetings.

Andrew Tyrie, chairman of the Treasury committee, said ministers should seize the opportunity provided by the shakeup of financial regulation that has been triggered by the near meltdown in the UK banking system to modernise Threadneedle Street.

"The Bank of England will play an even more vital role in preventing future crises, yet aspects of its governance appear antiquated," Tyrie said.

"Scrutiny of the Bank should reflect the needs of 21st-century democracy. That means clear lines of accountability and more information made available to parliament. It should also be crystal clear who is in charge at a time of financial crisis. On all these issues the government's draft legislation would benefit from improvement," Tyrie said.

A Treasury spokesperson said: "The government welcomes the TSC's report and will study the recommendations carefully in consultation with the Bank of England."

King said: "The Bank has always made clear that with the expansion of its responsibilities envisaged in the draft bill, new arrangements for the governance and accountability of the Bank would be necessary. The Bank will study the report carefully before responding to the committee."

The MPs raise the idea that the Bank – which is to be given new powers to deal with financial stability – should also be handed a remit for "sustainable growth", a topic on which they may begin a new inquiry along with a broader review on the structure of the Bank.

The report said a majority of members of the monetary policy committee, which sets interest rates, and the financial policy committee, charged with preventing future financial crises, should come from outside the Bank.

The MPs say that the chancellor should have more influence over the Bank and might want more control during times of turbulence. In its report, the Treasury committee said it had evidence suggesting that "the governance of the Bank needs strengthening and that it needs to be more open about its work. The Bank must be held more clearly to account than it has been in the past."

Kate Barker, a former independent member of the MPC, welcomed the report. "The direction of travel is welcome, because the way the new system is structured is not going to be satisfactory."

Barker said the reforms proposed by the Treasury committee would "shine a light" on how the Bank set about dealing with complex issues and give the chancellor greater ability to intervene when taxpayers' money was at risk. "Ministers are in danger of washing their hands of too much," Barker said.